Cost Accounting Common Terms and Definitions

This page contains essential cost accounting terms and definitions. Terms and definitions related to
standard cost specifically and variance, are also included.

Cost accounting – An area of accounting that involves measuring, recording, and reporting product costs.

Cost accounting system – Manufacturing cost accounts that are fully integrated into the general ledger of
a company.

Cost behavior analysis – The study of how specific costs respond to changes in the level of business
activity.

Fixed costs – Costs that remain the same in total regardless of changes in the activity level.

Variable costs Costs – that vary in total directly and proportionately with changes in the activity level.

Mixed costs – Costs that contain both a variable and a fixed cost element and change in total but not
proportionately with changes in the activity level.

Activity-based costing – A cost accounting system that focuses on the activities performed in
manufacturing a specific product.

Job cost sheet – A form used to record the costs chargeable to a specific job and to determine the total
and unit costs of the completed job.

Job order cost system – A cost accounting system in which costs are assigned to each job or batch.

Process cost system – A system of accounting used when a large quantity of similar products are
manufactured.

Absorption costing – A costing approach in which all manufacturing costs are charged to the product.

Variable costing – A costing approach in which only variable manufacturing costs are product costs, and
fixed manufacturing costs are period costs (expenses).

Materials requisition slip – A document authorizing the issuance of raw materials from the storeroom to
production.

Overapplied overhead – A situation in which overhead assigned to work in process is greater than the
overhead incurred.

Predetermined overhead rate – A rate based on the relationship between estimated annual overhead
costs and expected annual operating activity, expressed in terms of a common activity base.

Summary entry – A journal entry that summarizes the totals from multiple transactions.
Time ticket – A document that indicates the employee, the hours worked, the account and job to be
charged, and the total labor cost.

Underapplied overhead – A situation in which overhead assigned to work in process is less than the
overhead incurred.

Conversion costs – The sum of labor costs and overhead costs.

Cost driver – Any factor or activity that has a direct cause–effect relationship with the resources
consumed.

Cost reconciliation schedule – A schedule that shows that the total costs accounted for equal the total
costs to be accounted for.

Equivalent units of production – A measure of the work done during the period, expressed in fully
completed units.

Just-in-time processing – A processing system dedicated to producing the right products (or parts) as
they are needed.

Operations costing – A combination of a process cost and a job order cost system, in which products are
manufactured primarily by standardized methods, with some customization.

Physical units – Actual units to be accounted for during a period, irrespective of any work performed.

Process cost systems – An accounting system used to apply costs to similar products that are mass-
produced in a continuous fashion.

Production cost report – An internal report for management that shows both production quantity and
cost data for a production department.

Total units (costs) accounted for – The sum of the units (costs) transferred out during the period plus the
units (costs) in process at the end of the period.

Total units (costs) to be accounted for – The sum of the units (costs) started (or transferred) into
production during the period plus the units (costs) in process at the beginning of the period.

Unit production costs – Costs expressed in terms of equivalent units of production.

Weighted-average method – Method used to compute equivalent units of production which considers
the degree of completion (weighting) of the units completed and transferred out and the ending work in
process.

Activity index – The activity that causes changes in the behavior of costs.

Relevant range – The range of the activity index over which the company expects to operate during the
year.
Break-even point – The level of activity at which total revenues equal total costs.

Contribution margin ratio – The percentage of each dollar of sales that is available to apply to fixed costs
and contribute to net income; calculated as contribution margin per unit divided by unit selling price.

Contribution margin (CM) – The amount of revenue remaining after deducting variable costs.

Contribution margin per unit – The amount of revenue remaining per unit after deducting variable costs;
calculated as unit selling price minus unit variable cost.

Cost-volume-profit (CVP) analysis – The study of the effects of changes in costs and volume on a
company’s profits.

Cost-volume-profit (CVP) graph – A graph showing the relationship between costs, volume, and profits.

Cost-volume-profit (CVP) income statement – A statement for internal use that classifies costs as fixed or
variable and reports contribution margin in the body of the statement.

High-low method – A mathematical method that uses the total costs incurred at the high and low levels
of activity to classify mixed costs into fixed and variable components.

Margin of safety – The difference between actual or expected sales and sales at the break-even point.

Target net income – The income objective set by management.